If at First You Don’t Succeed: House Reps. Reintroduce the SHIELD Act

On February 27th, Reps. Peter DeFazio (D-Ore.) and Jason Chaffetz (R-Utah) reintroduced a “new and improved” Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 (or “SHIELD Act,” pleasing fans of both acronyms and imagery of strife). The legislation is intended to curb the rapid ascent of so-called “patent trolls,” which are reported to have brought 62% of all patent litigation in 2012, allegedly costing the U.S. economy $29 billion a year, while returning only a small fraction of licensing fees to original inventors. The term “patent troll” is itself controversial, with most academics now preferring to use “Patent Assertion Entities” (PAEs) to refer to firms whose business models focus on purchasing and asserting patents, rather than developing and/or manufacturing patented products.

As described by fellow contributor Will Pickens, the SHIELD Act would shift suits brought by PAEs from the “American model” of civil litigation (in which everyone pays their own legal fees, regardless of outcome) to a “loser pays” system (which is thought to deter frivolous or close-call suits with the threat of paying the winner’s attorneys). While this works in other, select areas of the law, the first iteration of the SHIELD Act failed to gain traction in the House. It was perceived to suffer from a number of flaws: (1) it lacked an effective enforcement mechanism; (2) it conditioned legal fees on a finding that the suit had no “reasonable likelihood of success,” which was viewed as easily met by PAEs; and (3) it was clumsily limited to computer hardware and software patents.

The “new and improved” version of the SHIELD Act attempts to address these issues by eliminating the industry-specific language and providing for a more robust enforcement mechanism. Specifically, the new legislation requires companies who fail to prove they are not a PAE to post a bond early in the suit in order to cover costs in the event that it loses. Some observers argue that this provision strikes at the heart of the PAE business model because it makes the PAEs’ strategy of “scattershot litigation” economically infeasible. Since the vast majority of judicial bonds must be fully collateralized, and the average patent infringement suit entails legal fees in excess of $1 million, only a small number of PAEs would have the capital sufficient to provide 100% collateral for the bonds required under the new SHIELD Act.

Still, proponents of the bill who hope it will bring the era of PAE litigation to an end may be disappointed. Skeptics have panned the legislation as deeply flawed. First and foremost, given that a mere 10 NPEs brought over one-sixth of all PAE suits in recent years, simply crippling “most” small PAEs with the bond requirement may not actually reduce the number of PAE suits by much. Many of the most active PAEs are well-capitalized, and may have no difficulty providing collateral under the requirements of the proposed legislation. Critics also claim that the SHIELD Act is both under- and over-inclusive, creating loopholes for PAEs to avoid the its provisions (not to mention tech heavyweights, which have also been known to bring meritless claims on occasion) while potentially penalizing otherwise innocent technology licensing companies.

All of this raises the question: does the SHIELD Act do too much, or too little, in singling out “patent trolls” as the root of all evil in the patent system?

2 Responses to If at First You Don’t Succeed: House Reps. Reintroduce the SHIELD Act

Great Post Niels. It seems that something needs to be done to curb the abuse in the system. A fee-shifting arrangement seems promising if the “reasonable likelihood of success” threshold can be defined with some clarity.

Also, I’d like to see Congress consider an exemption for Universities and other public research institutes. Educational institutions rarely produce their inventions, instead relying on their tech transfer office to monetize their work through licenses. It seems that a strong case could be made for exempting such entities from the PAE pool entirely.

To play devil’s advocate, there is also an economic concern with PAE’s and their tactics that the SHIELD Act may not solve. According to a recent study over 50% of the defendants in these PAE suits make less than $10 million a year. For small businesses such as those, they simply may not be able to wait out a lawsuit, not matter how meritorious their claims.

To illustrate the point, look to the Tech Forward v. Best Buy case. Best Buy met with the company to discuss purchasing their technology, but after it was disclosed, Best Buy killed the deal and used the misappropriated knowledge to build its own system. The evidence was stacked against Best Buy, but the huge corporation was betting on the little guy not having the capital to fight back, and as it turned out, it didn’t. The company was sold off, but the venture capitalists who initially funded it continued to pay for the lawsuit against Best Buy and eventually won. It’s a sad case, where despite the proven merits of the claims, the company still could not survive a law suit.

It’s good to hear that there are people taking action on this issue! I whole-heartedly believe that tax payers should not be footing this $29 billion bill – when little, if anything, is being produced to benefit society through such litigation. It makes sense to shift the costs onto those positioned to gained the most – the PAEs themselves. While their suits may not be “frivolous” in the ordinary sense, consistent policy concerns are raised in this sense that may warrant a shift away from the American system. I’m curious to see how this goes!